AfricaFocus (Washington, DC)

Zambia/Global - the Price of Tax Avoidance

Taxes pay teachers. Taxes train nurses. Taxes maintain roads, deliver medicine, provide clean water. This is as true in the developing world as it is in the developed world. Tax is the most important, sustainable and predictable source of public finance for almost all countries.

If countries are to eradicate poverty and hunger, then they will need to do so by increasing their own public finances -ndash; principally through tax revenues. This should be possible. Growth in the global economy is now occurring predominantly in developing countries. Yet incomes, education, child mortality and nutrition have failed to catch up in some of the fastest-booming economies. Funding continues to fall short for the public health services and agricultural assistance that can help reduce the burden of hunger; for the teachers, classrooms and schoolbooks that can help give the next generation a future free from poverty. Why?

This report explores one clear reason. In both developed and developing countries, the tax revenues needed to cover the ongoing costs of decent public services are being undermined by the ability of some of the wealthiest taxpayers -ndash; including many multinational companies -ndash; to effectively opt out of the corporate tax system through a combination of ingenious (and lawful) tax haven transactions, and huge tax concessions awarded by governments themselves.

To see how, and with what consequences, this report examines the tax practices of one of the world's largest food multinationals, the Associated British Foods (ABF) group, in one of the most impoverished places in which it operates. ABF produces staple brands like Silver Spoon sugar, Kingsmill bread, Ryvita and Patak's, and also owns clothing chain Primark. We look particularly at the activities of ABF's Zambian subsidiary, Zambia Sugar Plc.

The southern African country of Zambia demonstrates clearly the paradox of continuing hunger amidst plenty. Despite Zambia "graduating" last year from a low-income to a lower-middle-income country, poverty levels have stagnated, with the proportion of rural Zambians living in poverty increasing to nearly 90% since 2001. Zambia is an exporter of foodstuffs, including sugar; yet 45% of Zambian children are undernourished to the point of being stunted.

The argument of this report is simple: poverty and hunger cannot be ended if developing countries cannot raise revenues to provide for the needs of their own citizens.

A key part of this equation is stopping corporate tax avoidance and questionable corporate tax breaks, which together deny critical revenues to some of the world's poorest countries. The case of ABF's sugar operations in Zambia exemplifies a problem stretching across Africa and beyond: how countries both rich and poor are struggling to tax globally mobile profits and capital, and as a result are haemorrhaging tax revenues that might otherwise be available for the fight against poverty.

What we found

ActionAid's investigation found that ABF's Zambian subsidiary uses an array of transactions that have seen over a third of the company's pre-tax profits -ndash; over US$13.8 million (Zambian Kwacha 62 billion) a year -ndash; paid out of Zambia, into and via tax haven sister companies in Ireland, Mauritius and the Netherlands. Some of these transactions reduce Zambia Sugar's taxable profits, while the structure of others avoids the Zambian taxes ordinarily levied on such foreign payments themselves. Thanks to this financial engineering, we estimate that Zambia has lost tax revenues of some US$17.7 million (ZK78 billion) since 2007, when ABF took over the Illovo sugar group.

To put this figure in perspective:

In a country where over a third of child deaths are related to undernutrition, we estimate that the taxhaven transactions of just this one British headquartered food multinational has deprived the Zambian public purse of a sum over 14 times larger than the UK aid provided to Zambia to combat hunger and food insecurity in the same period.

Add in the effect of special tax breaks received by Zambia Sugar -ndash; which we estimate will in future years reduce the company's tax bill by at least US$3.6 million a year and rising -ndash; and the foregone tax revenues in a single year could likely cover the entire cost of the interventions needed to tackle child malnourishment in Zambia.

We estimate that the amount of tax the Zambian government currently foregoes through the company's tax haven transactions is enough to put an extra child in primary school every 12 minutes.

While the main corporate tax rate in Zambia is 35%, since 2007 ABF's Zambian subsidiary has, overall, paid less than 0.5% of its US$123 million pre-tax profits in corporate income tax -ndash; averaging under ZK450 million (US$90,000) a year. The company took the government to court to win a special retrospective tax break in 2007 and received a large refund of tax paid in earlier years. Between 2008 and 2010, Zambia Sugar made no corporate income tax payments at all.

Associated British Foods told us that this tiny tax bill is the result of capital allowances that companies in Zambia are entitled to claim against their taxable profits: in the case of its Zambian subsidiary, resulting from spending on a recentexpansion of its Zambian sugar mill, now the largest in Africa. Certainly generous capital allowances -ndash; the subject of current Zambian government scrutiny -ndash; may significantly reduce the company's tax liability. But we have also identified four strategies that have significantly reduced Zambia Sugar's taxable profits to begin with, and that have avoided separate Zambian taxes on the company's financing and dividends:

Mystery management: Zambia Sugar has paid out large 'purchasing and management' fees to an Irish sister company -ndash; a company that seems to have no physical presence in Ireland.9 Every year since 2006, this company's audited Irish accounts have also repeatedly stated that the company has no employees, while providing Zambia Sugar with nearly US$2.6 million worth of management services each year, though ABF has subsequently claimed that the "company employs some 20 individuals, the notes to the company's accounts failed to reflect this". We also examine similar payments for 'export agency' services to a sister subsidiary company registered in Mauritius that has no employees permanently there, according to other Mauritius-based Illovo staff.

A Dublin dog-leg: Large loans from South African and US commercial banks, borrowed to finance the recent expansion of the company's estate and sugar mill in southern Zambia, have been 'dog-legged' through Ireland -ndash; despite being borrowed in Zambian currency and repaid via a bank account held by the Irish company at a bank branch in downtown Lusaka. This arrangement -ndash; sometimes described as 'treaty shopping' -ndash; takes advantage of a particularly unfair tax treaty between Zambia and Ireland, which prevents the Zambian government from charging any of the tax that would normally be levied on the interest payments made on these loans.

Order a tax-free takeaway: Zambia Sugar is able to send profits back to its parent company, Illovo Sugar Ltd, nearly tax-free by re-shuffling the ownership of the company through a string of Irish, Mauritian and Dutch holding companies, taking advantage of tax treaty loopholes and tax haven regimes to cancel tax on its dividend payments.

As well as these ingenious tax haven transactions, since 2007 the company has been able to enjoy its own special low tax regime within Zambia itself, exploiting two separate tax breaks originally intended respectively for domestic Zambian farmers and big foreign investors.

First, taking the Zambian Revenue Authority to court in 2007, the company successfully won the right to reclassify all of its revenues as 'farming income' -ndash; despite three-quarters of its income and profits in fact deriving from industrial sugar manufacture, partly from sugarcane purchased from independent cane-growers. This has allowed the company to reduce its tax rate from the 35% paid by most Zambian businesses to just 15%. As well as low taxes for the foreseeable future, Zambia Sugar also received a US$6.3 million (ZK24.6 billion) rebate for previous years. In 2012 the Zambian government reduced this 'farming' tax rate further to just 10%, a reduction that in future years will push Zambia Sugar's tax rate below some of the rates its sister companies enjoy in tax havens.

Second, since 2011 the company has been granted an additional tax break to offset the costs of an expanded factory, under a special Zambian tax regime intended to attract new foreign investment. The precise terms of this tax break remain confidential, despite a Zambian law requiring the government to make information about investment incentives granted to big companies to be publicly accessible. Despite the company already booking record profits since its expansion, Zambia Sugar can use this second tax break to keep its tax bill low for years to come.

Plain vanilla business practice

We do not allege that any of the companies in this report have done anything illegal. Indeed, sadly their tax practices are not even particularly unusual. A growing litany of examples from Europe and North America suggest that the arrangements we describe here are simply 'plain vanilla' business practice for many multinationals, thanks to loopholes in prevailing international tax rules coupled with tax competition in developing countries -ndash; an international 'race to the bottom' to attract foreign investors with huge tax breaks.

Tax avoidance is less widely documented in the developing world than in the developed, but the findings of this report and ActionAid's previous investigation of Africa's biggest brewer, the UK-headquartered SABMiller, suggest that it is no less prevalent. Indeed there is evidence that the developing countries which can least afford it may be haemorrhaging more of their corporate tax revenues than countries like the UK.

In many places, multinational companies and their advisers are beginning to regard paying corporate taxes as optional. When John Whiting, head of the UK Treasury's Office of Tax Simplification and policy director of the UK's Chartered Institute of Taxation -ndash; the UK trade body of tax advisers -ndash; was asked recently why many large multinationals were not paying corporate tax, he replied: "In many ways corporation tax is a bit of a bonus."

For ordinary taxpayers, of course, paying tax is far from optional or a "bonus". Ordinary people have no choice but to pay the business taxes collected directly from their shops and small businesses, the income tax deducted from their payslips, and the VAT included in the price of the goods they buy. This includes the workers who produce and sell multinational companies' products. While the ABF group's African sugar operations have shrunk their own tax bill through ingenious tax haven transactions, and have been granted even further tax breaks, their workers in Zambia have continued to pay their taxes on their wages.

From 2008 to 2010, an agricultural labourer employed by the company has paid more income tax in absolute terms than the company whose US$200 million revenues have benefitted from her labour. And even when Zambia Sugar has been paying some corporate income tax in Zambia, as in 2011 and 2012, it has still paid 20 times less income tax, relative to its income, than the tax paid by its own agricultural workers; and 90 times less than the tax paid by the small traders who sell Zambia Sugar's products to consumers.

This report traces the international money trail to find out how this tax injustice has happened. We look at what it means for those struggling with undernourished families, overcrowded schools and underfunded health services on the doorstep of Zambia Sugar's vast Mazabuka estate.

Where else?

Beyond Zambia, the ABF group also has sugar mills and plantations in Mozambique, Malawi, Tanzania, South Africa and Swaziland. So far ActionAid has only been able to access the accounts of the Malawian, Zambian and South African companies, as these are publicly listed companies. The other subsidiaries' tax behaviour remains closed to public scrutiny. Unless ABF publishes the accounts of the rest of the Illovo Group companies, including in Mauritius and other tax havens, we cannot know whether other African countries are getting a fair tax deal from their sugar industries.

What can be done?

There is now emerging international consensus that something must be done to stop corporate tax avoidance. UK Prime Minister David Cameron has promised international action, saying that, "it's not right if you have businesses [who] instead of paying some taxes somewhere are paying no taxes anywhere".

He has pledged that when the UK hosts the G8 summit in June 2013, "this G8 will seek to maintain the momentum generated by the G20 on information exchange and the strengthening of international tax standards. We will look to go further including, for example, on tax havens by improving the quality and quantity of tax information exchange. And we will work with developing countries to help them improve their ability to collect the tax that is due to them too." Likewise Zambian finance minister Alexander Chikwanda has promised to toughen Zambian laws to prevent companies shifting profits into tax havens,and a comprehensive review of Zambia's "proliferation of inefficient tax incentives" during 2013.17

This report shows how tackling the problem will require both national and international action across three fronts: companies' ingenious financial engineering, weak international tax rules, and governments' deliberate tax policies. While the group of companies detailed in this report have taken (lawful) advantage of loopholes in international tax laws, they have also benefited from tax breaks deliberately written into countries' tax codes, responsibility for which ultimately lies with governments.

Responsible companies must make paying their fair share of corporate tax a core part of their responsibilities to the countries where they make their profits.

Governments must close loopholes in national tax codes and tax treaties that allow the kinds of tax haven transactions outlined in this report. Donor and developed country governments have a particular responsibility to ensure that their own tax regimes and tax treaties do not make it easier for corporate profits to be siphoned out of developing countries.

Governments must not give away vital revenues through corporate tax breaks without evidence of real benefits to their citizens in terms of new jobs, economic opportunities and public revenues.\

Finally, international action is needed to end the secrecy and abusive tax regimes of tax havens around the world.

Responsible companies; stronger tax authorities; better tax laws; and, critically, public action and scrutiny -ndash; all have a part to play in protecting the revenues that Zambia and many other countries need to resource their own futures.

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